Core Topic: Exploring the applicable scenarios for burn and redistribution mechanisms in cryptocurrency, emphasizing that redistribution is superior when economic value impacts system security.

Key Definitions:

* Slashing: The act of reclaiming assets from malicious actors.

* Burn vs. Redistribution: Methods for handling the reclaimed assets. Burning reduces the total supply, while redistribution transfers the value to other parties.

The Advantages of Redistribution:

* Enhances economic security. For example, in systems like EigenCloud, when malicious operators are slashed, redistributing those funds compensates affected users and retains value within the ecosystem.

* Supports innovative applications, such as on-chain insurance protocols and decentralized transaction compensation.

* The main challenge lies in more complex mechanism design, which must guard against risks like malicious collusion or compromised keys.

When Burning is Preferable:

Burning is more suitable when the core mechanism is a *deflationary economic model** (like BNB's quarterly burns or Ethereum's EIP-1559) and does not involve slashing.

* In these cases, redistribution could dilute the deflationary effect, lead to improper allocation of funds, or even incentivize spam transactions.

Summary and Conclusion:

In scenarios involving *slashing, redistribution is generally superior to burning**, as it incentivizes honest behavior and helps maintain system security.

In standalone burn mechanisms (where no slashing occurs), *redistribution offers no advantage** and the original design should be maintained.

Summary

Author: Pavel

Compilation: Deep Chao TechFlow

Abstract

We are exploring whether it is better to burn assets or redistribute them to maintain system health and ensure incentive mechanisms are reasonable.

* When slashing is the initial step for punishing malicious behavior, redistributing assets is often more efficient than simply burning them.

* When burning is a core feature of the design and does not involve slashing (e.g., deflationary economic models), there is no reason to implement redistribution.

* When redistribution is a core feature of the design but behaves like an exploit, it shouldn't be replaced with burning; instead, the design itself needs fundamental improvement.

Definitions

Many people seem confused, thinking that when a token is heavily slashed, the slashed stake is automatically burned, reducing the supply. But that's not the case.

* Slashing: Refers to "reclaiming" assets from malicious actors.

* Burning and Redistribution: Describe what happens next to these reclaimed assets.

As mentioned before, slashed assets can either be burned or redistributed:

* Burning reduces the total supply.

* Redistribution transfers the value to another party (not necessarily the victim).

Additionally, burning can also occur independently via protocol-internal mechanisms, without any slashing involved.

How Redistribution Enhances Economic Security

Let's take EigenCloud, one of the most prominent protocols in crypto today, as an example. Its operators get slashed for failing their duties – which is good: malicious actors are punished. However, before introducing the redistribution of slashed funds, these funds were typically burned (and still can be).

We argue that burning slashed funds in such a system is like shooting yourself in the foot. Because when an operator's stake is slashed: the operator is punished (for a reason), but:

1. The affected party receives no compensation (imagine a victim hit by a car, the driver goes to jail, but the victim gets no help).

2. The system's security decreases (because the assets securing it are reduced).

Why burn this value when you can retain it and transfer it to the affected party? Through redistribution, reliable participants can get more rewards, affected users can be compensated, and value stays within the ecosystem, merely being reallocated. This also unlocks more application scenarios, such as:

* New types of on-chain insurance protocols running in a permissionless manner;

* Faster and guaranteed decentralized exchange (DEX) trades, e.g., compensating traders if a request fails, expires, or isn't fulfilled in time;

* More incentives for operators to run their services honestly and transparently;

* Protecting lenders with guaranteed APR, higher transparency, and potential native fixed rates.

Economic security can directly protect users not only before an incident (e.g., via burning mechanisms) but also after an incident. Protocols like Cap have already implemented redistribution features, where funds from slashed operators are redistributed to affected cUSD holders.

Challenges of Redistribution

Burning assets is easier than redistributing them. It requires no concern for subsequent handling of the assets – just burn them. There's neither significant gain nor risk. Burning offers fewer benefits but also carries significantly lower risk. Redistribution, however, dramatically changes the game. Transferring value from malicious actors to victims isn't as straightforward as it seems.

Malicious operators might now collude with malicious Actively Validated Services (AVS). Currently, an AVS can implement any custom slashing logic, even if it's unfair or non-objective. In a burning mechanism, the AVS has little incentive to act maliciously, as operators wouldn't stake knowing they could be slashed for non-objective reasons.

But in a redistribution mechanism, an AVS could transfer one operator's stake to another malicious operator (they collude), essentially extracting value from the system. A similar scenario could occur if the AVS keys are compromised, which could also affect the overall "appeal" for operators or AVSs.

This necessitates additional evaluation in mechanism design:

* Operators shouldn't have a "switch type" option after creation;

* A method should be provided to identify compromised (malicious) operators and redistribute the value (if it ends up with malicious parties), along with continuous monitoring, etc.

While burning funds is simpler, redistribution is fairer, though it requires additional complexity.

Fixing Flawed Redistribution

The Maximum Extractable Value (MEV) scenario can be viewed from this perspective: innocent users and LPs can be slashed for no reason. For instance, when a user wants to swap assets, they might suffer from front-running or sandwich attacks, resulting in a worse output (price).

One could confidently say they were slashed because they submitted stake (assets for the swap) to the system (DEX) and held it for a period (swap time), ultimately receiving far less than expected.

There are two core issues here:

1. LPs are slashed for no reason (they did nothing malicious).

2. Users are slashed for no reason; they did nothing malicious, weren't trying to profit from or contribute to the system – they just wanted their operation executed.

Here, value is extracted and redistributed, the exploiter is rewarded, and the party that did nothing wrong is slashed.

Can burning solve these problems?

* Burning could provide diffuse benefits for all token holders but doesn't specifically compensate LPs who directly lost value to arbitrage activities.

Theoretically, burning could* solve the problem because if profits are burned, there's no incentive for arbitrage.

* However, once arbitrage profits are extracted, identifying this arbitrage becomes more difficult: while on-chain transactions are visible, CEX data doesn't show the exact addresses of traders.

In this specific MEV case, neither redistribution nor burning is a truly viable option; they only treat the symptoms. The problem requires fundamental changes at the design level, such as implementing application-specific ordering rules (e.g., Arbitrum BOLD) or solutions like Angstrom's, which let LPs capture the value that would otherwise be taken by exploiters. This approach works quite well.

Here, a flawed redistribution design can be addressed by application-specific ordering rules, making redistribution unnecessary or different in nature. Simply replacing this flawed redistribution with burning wouldn't solve the core issue.

Scenarios Where Burning Outperforms Redistribution

To be clear, redistribution is not a universal solution. Burning is more suitable in the following case: When slashing is not involved, and burning is a core feature of the mechanism design.

Take BNB as an example. BNB's quarterly burn is a core feature of its deflationary token economic model. It cannot be replaced by redistribution because this process involves neither an exploiter nor victimized users.

A similar process occurs in ETH's design (EIP-1559), where the base fee is burned, creating a deflationary effect. Considering Ethereum's mechanism design, fees can become very high during network congestion. One might argue that instead of burning the base fee, it could be sent to a treasury fund used to compensate for part of the fees during congestion. However, the drawbacks far outweigh potential advantages:

* Redistributing fees could dilute the deflationary effect, lead to higher inflation, and potentially depress the token's value over time;

* Funds could be misallocated, and revenue could decrease (e.g., which transactions should the fund prioritize? Is it fair for users paying priority fees if fees can be compensated by the fund? etc.);

* Knowing fees might be compensated could make it easier to generate spam transactions, worsening congestion;

* If the base fee were redistributed to Ethereum stakers, it might incentivize validators to prioritize high-fee transactions, ignoring those not sponsored or pre-paid.

There are many other similar cases, but the key point is that redistribution is not a panacea. If burning happens independently (no slashing involved), there is little reason to replace it with redistribution.

Conclusion

Ultimately, we want to point out that redistribution typically performs worse than burning in scenarios where slashing is not involved, while redistribution usually functions better than burning in scenarios where slashing is involved.

The problem of incentive mechanism misalignment is a long-standing issue in crypto and usually varies protocol by protocol. If economic value directly impacts the system's security or other critical factors, it's generally better not to burn this value but to find a way to correctly redistribute it to those acting honestly, thereby incentivizing fair and honest behavior.

Core Topic: Exploring the applicable scenarios for burn and redistribution mechanisms in cryptocurrency, emphasizing that redistribution is superior when economic value impacts system security.

Key Definitions:

* Slashing: The act of reclaiming assets from malicious actors.

* Burn vs. Redistribution: Methods for handling the reclaimed assets. Burning reduces the total supply, while redistribution transfers the value to other parties.

The Advantages of Redistribution:

* Enhances economic security. For example, in systems like EigenCloud, when malicious operators are slashed, redistributing those funds compensates affected users and retains value within the ecosystem.

* Supports innovative applications, such as on-chain insurance protocols and decentralized transaction compensation.

* The main challenge lies in more complex mechanism design, which must guard against risks like malicious collusion or compromised keys.

When Burning is Preferable:

Burning is more suitable when the core mechanism is a *deflationary economic model** (like BNB's quarterly burns or Ethereum's EIP-1559) and does not involve slashing.

* In these cases, redistribution could dilute the deflationary effect, lead to improper allocation of funds, or even incentivize spam transactions.

Summary and Conclusion:

In scenarios involving *slashing, redistribution is generally superior to burning**, as it incentivizes honest behavior and helps maintain system security.

In standalone burn mechanisms (where no slashing occurs), *redistribution offers no advantage** and the original design should be maintained.

Summary

Author: Pavel

Compilation: Deep Chao TechFlow

Abstract

We are exploring whether it is better to burn assets or redistribute them to maintain system health and ensure incentive mechanisms are reasonable.

* When slashing is the initial step for punishing malicious behavior, redistributing assets is often more efficient than simply burning them.

* When burning is a core feature of the design and does not involve slashing (e.g., deflationary economic models), there is no reason to implement redistribution.

* When redistribution is a core feature of the design but behaves like an exploit, it shouldn't be replaced with burning; instead, the design itself needs fundamental improvement.

Definitions

Many people seem confused, thinking that when a token is heavily slashed, the slashed stake is automatically burned, reducing the supply. But that's not the case.

* Slashing: Refers to "reclaiming" assets from malicious actors.

* Burning and Redistribution: Describe what happens next to these reclaimed assets.

As mentioned before, slashed assets can either be burned or redistributed:

* Burning reduces the total supply.

* Redistribution transfers the value to another party (not necessarily the victim).

Additionally, burning can also occur independently via protocol-internal mechanisms, without any slashing involved.

How Redistribution Enhances Economic Security

Let's take EigenCloud, one of the most prominent protocols in crypto today, as an example. Its operators get slashed for failing their duties – which is good: malicious actors are punished. However, before introducing the redistribution of slashed funds, these funds were typically burned (and still can be).

We argue that burning slashed funds in such a system is like shooting yourself in the foot. Because when an operator's stake is slashed: the operator is punished (for a reason), but:

1. The affected party receives no compensation (imagine a victim hit by a car, the driver goes to jail, but the victim gets no help).

2. The system's security decreases (because the assets securing it are reduced).

Why burn this value when you can retain it and transfer it to the affected party? Through redistribution, reliable participants can get more rewards, affected users can be compensated, and value stays within the ecosystem, merely being reallocated. This also unlocks more application scenarios, such as:

* New types of on-chain insurance protocols running in a permissionless manner;

* Faster and guaranteed decentralized exchange (DEX) trades, e.g., compensating traders if a request fails, expires, or isn't fulfilled in time;

* More incentives for operators to run their services honestly and transparently;

* Protecting lenders with guaranteed APR, higher transparency, and potential native fixed rates.

Economic security can directly protect users not only before an incident (e.g., via burning mechanisms) but also after an incident. Protocols like Cap have already implemented redistribution features, where funds from slashed operators are redistributed to affected cUSD holders.

Challenges of Redistribution

Burning assets is easier than redistributing them. It requires no concern for subsequent handling of the assets – just burn them. There's neither significant gain nor risk. Burning offers fewer benefits but also carries significantly lower risk. Redistribution, however, dramatically changes the game. Transferring value from malicious actors to victims isn't as straightforward as it seems.

Malicious operators might now collude with malicious Actively Validated Services (AVS). Currently, an AVS can implement any custom slashing logic, even if it's unfair or non-objective. In a burning mechanism, the AVS has little incentive to act maliciously, as operators wouldn't stake knowing they could be slashed for non-objective reasons.

But in a redistribution mechanism, an AVS could transfer one operator's stake to another malicious operator (they collude), essentially extracting value from the system. A similar scenario could occur if the AVS keys are compromised, which could also affect the overall "appeal" for operators or AVSs.

This necessitates additional evaluation in mechanism design:

* Operators shouldn't have a "switch type" option after creation;

* A method should be provided to identify compromised (malicious) operators and redistribute the value (if it ends up with malicious parties), along with continuous monitoring, etc.

While burning funds is simpler, redistribution is fairer, though it requires additional complexity.

Fixing Flawed Redistribution

The Maximum Extractable Value (MEV) scenario can be viewed from this perspective: innocent users and LPs can be slashed for no reason. For instance, when a user wants to swap assets, they might suffer from front-running or sandwich attacks, resulting in a worse output (price).

One could confidently say they were slashed because they submitted stake (assets for the swap) to the system (DEX) and held it for a period (swap time), ultimately receiving far less than expected.

There are two core issues here:

1. LPs are slashed for no reason (they did nothing malicious).

2. Users are slashed for no reason; they did nothing malicious, weren't trying to profit from or contribute to the system – they just wanted their operation executed.

Here, value is extracted and redistributed, the exploiter is rewarded, and the party that did nothing wrong is slashed.

Can burning solve these problems?

* Burning could provide diffuse benefits for all token holders but doesn't specifically compensate LPs who directly lost value to arbitrage activities.

Theoretically, burning could* solve the problem because if profits are burned, there's no incentive for arbitrage.

* However, once arbitrage profits are extracted, identifying this arbitrage becomes more difficult: while on-chain transactions are visible, CEX data doesn't show the exact addresses of traders.

In this specific MEV case, neither redistribution nor burning is a truly viable option; they only treat the symptoms. The problem requires fundamental changes at the design level, such as implementing application-specific ordering rules (e.g., Arbitrum BOLD) or solutions like Angstrom's, which let LPs capture the value that would otherwise be taken by exploiters. This approach works quite well.

Here, a flawed redistribution design can be addressed by application-specific ordering rules, making redistribution unnecessary or different in nature. Simply replacing this flawed redistribution with burning wouldn't solve the core issue.

Scenarios Where Burning Outperforms Redistribution

To be clear, redistribution is not a universal solution. Burning is more suitable in the following case: When slashing is not involved, and burning is a core feature of the mechanism design.

Take BNB as an example. BNB's quarterly burn is a core feature of its deflationary token economic model. It cannot be replaced by redistribution because this process involves neither an exploiter nor victimized users.

A similar process occurs in ETH's design (EIP-1559), where the base fee is burned, creating a deflationary effect. Considering Ethereum's mechanism design, fees can become very high during network congestion. One might argue that instead of burning the base fee, it could be sent to a treasury fund used to compensate for part of the fees during congestion. However, the drawbacks far outweigh potential advantages:

* Redistributing fees could dilute the deflationary effect, lead to higher inflation, and potentially depress the token's value over time;

* Funds could be misallocated, and revenue could decrease (e.g., which transactions should the fund prioritize? Is it fair for users paying priority fees if fees can be compensated by the fund? etc.);

* Knowing fees might be compensated could make it easier to generate spam transactions, worsening congestion;

* If the base fee were redistributed to Ethereum stakers, it might incentivize validators to prioritize high-fee transactions, ignoring those not sponsored or pre-paid.

There are many other similar cases, but the key point is that redistribution is not a panacea. If burning happens independently (no slashing involved), there is little reason to replace it with redistribution.

Conclusion

Ultimately, we want to point out that redistribution typically performs worse than burning in scenarios where slashing is not involved, while redistribution usually functions better than burning in scenarios where slashing is involved.

The problem of incentive mechanism misalignment is a long-standing issue in crypto and usually varies protocol by protocol. If economic value directly impacts the system's security or other critical factors, it's generally better not to burn this value but to find a way to correctly redistribute it to those acting honestly, thereby incentivizing fair and honest behavior.